A super interesting week lies ahead after a relatively tumultuous few days in which stocks saw flows shift from supportive to destructive. We had been hinting at this for a while, with stretched AI valuations and the recent hawkish Fed rate cut all primed to grab centre stage at some point. Of course, timing these things is what we all try and do best; after all, we are here to tell you about significant themes in a timely fashion, and when they might impact the market and price action.
The ‘elevator down’ dynamics were in play in the latter part of last week. This describes the tendency for the stock market to experience sharp, rapid declines (‘elevator down’) after a period of gradual growth (‘stairs up’). Investor psychology plays a big part in this as relative fear can cause panic selling amid 24/7 news coverage about “Wall Street tumbling”. Market dynamics are also key as huge trading algos amplify the drops. And yet the benchmark S&P 500 is actually still less than 4% from its record high while the tech-laden Nasdaq is around 5.7% off its all-time top.
Do we get a seasonal year-end rally? A healthy correction of frothy markets is historically a good thing over the long term. Much will depend on Nvidia’s results which will be published after the US closing bell on Wednesday. Focus will be on commentary around demand and spending trends. Also of note will be some of the biggest US retailer earnings reports, like Walmart and Home Depot, which will be published through the week.
The dearth of US data had left FX markets volatility muted but this will pick up this week with the release (finally!) of the US September NFP report (and NVDA’s results). We note open interest on bullish Treasury options increased significantly last week, suggesting the prevailing call is for soft US data which will prompt dovish Fed repricing. But markets have shifted in recent days on more hawkish Fedspeak, with traders now seeing only a 45% chance of a 25bp December Fed rate cut from near double this less than a month ago. Again, we’ll be watching both the S&P 500 index and Nasdaq’s 50-day SMAs as support/resistance. We haven’t seen three straight weeks of losses in the Nasdaq since March.